When you become an adult, you have most likely already got all your money habits formed even if you haven’t started “implementing” them yet.
If you have bad money habits it is likely they will stick with you for a long time unless some life event knocks them out of you, alternatively if you have good habits it is unlikely you will all sudden become a flamboyant spender blowing all your savings on the next new big thing.
In Prosperous, at our first financial planning meeting we often ask new clients “what did you learn from your parents about money” followed by “and how do you think it affected the way you deal with money?”
It is hardly scientific, but interestingly, in our experience it is about 50/50 that people either treat money exactly the same way their parents did or they treat money exactly the opposite way. But what is evident is that 100% of people are influenced by their parents and how they handled money.
You need to consider this when you think about your own kids. What are you teaching them about money? What is it you do that you could do better? What habits are they picking up? But also, are they learning by osmosis or are you teaching them with intent.
Even if you are terrible with money it does not mean your kids can’t learn how to be good with money from you, but it does mean you need to be intentional about teaching them. Here are some top tips about teaching kids about money (some of which you might even try for yourself!)
Giving kids even a small amount of money is a really good way of teaching them to be responsible with their money. It does not need to be a large amount of money and they should get it in return for doing some jobs around the house or helping in some other way, you shouldn’t just give it to them for nothing. It also needs to be regular.
They should save the regular money they get. Get them into the habit that when they get their pocket money they divide it up. They save some for short term stuff, like the cinema this weekend. Save some for long term (long term in their minds) stuff like a bike or playstation and then one of the most important things is that they spend some. The important thing is the short and long-term savings are sorted before the spending is allowed.
How much should they save?
This depends on how much they are getting, but 25% on short term goals. 50% on long term goals and blow 25% is a good breakdown. If they are getting very little, then 25% to blow may not be enough.
Think about it this way, as a high earner 50% of your money is probably going to disappear on tax, 25% will go on bills/rent/mortgage and 25% will go on immediate expenses in later life. Teach your kids this early.
It is important they decide what the goals are and not you. This is their money they need to have control over what it is spent on. It is also important they do their own research. If for example they are buying a bike they need to find the bike they want. Bring them to see it, but don’t buy it. See if they can find it cheaper online (maybe with your help). Get them to look at second hand bikes too.
If their granny, granddad, uncle, aunt or somebody else gives them a windfall of say €5 or €10, or they make their communion, or have a birthday the same rules apply.
Save some for short and long term and spend some. These windfalls in business are known as capital receipts. Capital receipts are not supposed to be blown! They are to be used to get you to your short and long-term goals sooner.
This can be hard, but you can not give in and help your child out by topping up their savings to get them to their goal sooner. They need to experience the waiting and even at times they may be disappointed after the purchase, this is all part of the learning about money. Being disappointed, although heart breaking to watch, is a valuable lesson for them to learn about money.
If for some reason they need to get to their goal quicker. For example, their bike breaks and they need a new one. Don’t give them a top up, instead give them a loan of money. Be ruthless here, charge them interest. You don’t need to go mad on the interest but teach them there is a cost to having to borrow money. Make it a negative experience.
The opposite to this is if the child has an older brother or sister, they can lend money to them and charge them interest. This will need to be supervised by you, but it can be a good way of showing the opposite side of loans and teach them why banks are so keen to give out money to people.
Throughout their own lives it is likely they will come across things they want to donate to. They may not get the concept but sometimes kids surprise us and come out with ideas about how they want to help others.
I am a financial planner not a parental guidance counsellor, but I believe this should be encouraged. Some restrictions may need to put in place but use your own judgement on that. You may be tempted to allow them to give all their money to charity leaving them with no money. Just remember most of us could not do that with our own wages so don’t teach your child to do something they can’t keep up forever.
When they buy the things they have saved for, they should not spend more than half their savings on any one item. The reason for this is because if they are saving for a long time for something and then blow all their savings on it, they could very quickly loose interest in ever saving again. Particularly if they end up with a post purchase downer.
What age should you start?
You should start now. There is never an age when you are too young but the reality of it is you need to keep it age appropriate. Learning about money doesn’t always have to include actual money, very young kids learns to share etc in other ways. As they get older for example 3-5 years then they really start to understand money exists and use it in their play things and would be glad to hand in the money in a shop. As they get older the lessons become more sophisticated, but they are always learning.
With enough.ie we teach transition years students in secondary schools about managing money, this is a different programme to some of the stuff we talked about here, but the principles are the same, it is just the way it is delivered that changes.